Insurance Industry Regulation. Unfair Claims Settlement Practices. Insurance Code (h) 1 & 2

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1 Insurance Industry Regulation The Insurance Code established The California Department of Insurance to regulate the practice of insurance in California. To a large extent they are involved in financial integrity, solvency, and recently fraud investigation and prosecution. To an even lesser extent they are involved in regulation of claims administration. Unfair Claims Settlement Practices The California Insurance Code section specifies a list of unfair methods of competition or unfair or deceptive acts or practices in the business of insurance. Since these sections are not in the Labor Code, they are not commonly known in the Workers' Compensation Community. Section part (h) is of particular interest since it lists specific unfair claims settlement practices that should be avoided. Insurance Code (h) 1 & The following are hereby defined as unfair methods of competition and unfair and deceptive acts or practices in the business of insurance. (h) Knowingly committing or performing with such frequency as to indicate a general business practice any of the following unfair claims settlement practices: (1) Misrepresenting to claimants pertinent facts or insurance policy provisions relating to any coverages at issue. (2) Failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 1

2 Insurance Code (h) 3,4 & 5 (3) Failing to adopt and implement reasonable standards for the prompt investigation and processing of claims arising under insurance policies. (4) Failing to affirm or deny coverage of claims within a reasonable time after proof of loss requirements have been completed and submitted by the insured. (5) Not attempting in good faith to effectuate prompt, fair, and equitable settlements of claims in which liability has become reasonably clear. Insurance Code (h) 6 & 7 (6) Compelling insureds to institute litigation to recover amounts due under an insurance policy by offering substantially less than the amounts ultimately recovered in actions brought by the insureds, when the insureds have made claims for amounts reasonably similar to the amounts ultimately recovered. (7) Attempting to settle a claim by an insured for less than the amount to which a reasonable person would have believed he or she was entitled by reference to written or printed advertising material accompanying or made part of an application. Insurance Code (h) 8,9 & 10 (8) Attempting to settle claims on the basis of an application which was altered without notice to, or knowledge or consent of, the insured, his or her representative, agent, or broker. (9) Failing, after payment of a claim, to inform insureds or beneficiaries, upon request by them, of the coverage under which payment has been made. (10) Making known to insureds or claimants a practice of the insurer of appealing from arbitration awards in favor of insureds or claimants for the purpose of compelling them to accept settlements or compromises less than the amount awarded in arbitration. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 2

3 Insurance Code (h) 11 &12 (11) Delaying the investigation or payment of claims by requiring an insured, claimant, or the physician of either, to submit a preliminary claim report, and then requiring the subsequent submission of formal proof of loss forms, both of which submissions contain substantially the same information. (12) Failing to settle claims promptly, where liability has become apparent, under one portion of the insurance policy coverage in order to influence settlements under other portions of the insurance policy coverage. Insurance Code (h) (13) Failing to provide promptly a reasonable explanation of the basis relied on in the insurance policy, in relation to the facts or applicable law, for the denial of a claim or for the offer of a compromise settlement. (14) Directly advising a claimant not to obtain the services of an attorney. (15) Misleading a claimant as to the applicable statute of limitations. Insurance Code (h)16 (16) Delaying the payment or provision of hospital, medical, or surgical benefits for services provided with respect to acquired immune deficiency syndrome or AIDS-related complex for more than 60 days after the insurer has received a claim for those benefits, where the delay in claim payment is for the purpose of investigating whether the condition preexisted the coverage. However, this 60-day period shall not include any time during which the insurer is awaiting a response for relevant medical information from a health care provider. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 3

4 10 - CCR Standards for Prompt, Fair and Equitable Settlements Insurance Code has been implemented by Regulations (10-CCR Standards for Prompt, Fair and Equitable Settlements) which embellish the statute. More concrete time limits are established for the investigation and claim decision process. The California Labor Code, and DWC Regulations would supercede these requirements for the most part since we have our own time limits. Carrier Ethics and the Development of Civil Actions for Bad Faith History of and Point of Bad Faith Litigation Bad faith litigation is an extraordinary remedy claimed against an insurance company. Bad faith law developed in California over time and is now a fully embellished doctrine of insurance law. In civil actions, it can be brought by both the insured (first party cases) and by the claimant(third party cases). In civil actions, the point is mostly to make the insurance carrier pay an amount in excess of the policy limit. In egregious cases, the point is to obtain punitive damages. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 4

5 Employee and Employers Claims in Workers Compensation Cases The Courts have not allowed injured workers a cause of action for bad faith, However an employer does have the ability to bring a bad faith and breach of contract action against its insurer for negligent claims handling. Most of the law developed as a result of litigation by employers against the SCIF. There is a five year statute of limitations (CCP ) Employee Action for Outrageous Conduct A cause of action was stated against an insurance carrier where its agents, in investigating a claim, conducted themselves in an outrageous manner. In that case, the investigator sought to obtain evidence of the injured employee s disability by fraud and deceit (started dating the employee to get better evidence) (O Brien, P 1457). Unruh v Truck Insurance Exchange (1972) 37 CCC 590. Delay is Not Outrageous Conduct The cases attempting to get civil damages against a carrier for delay in payment of benefits has been held to not be outrageous conduct. Everfield v SCIF (1981) 115 Cal.App 3 rd 15, and Droz v Pacific Ins. Co (1982) 138 Cal. App. 3 rd 181 Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 5

6 Bad Faith Elements Bad faith is based upon theories in tort (fraud, oppression or malice) or contract (breach of covenant of good faith and fair dealing). We will explain what does and does not violate these standards. An insurer s implied covenant of good faith and fair dealing requires it to conduct its functions of defending, investigating, reserving, and settling claims with good faith regard to their effect upon an employer s premiums, as determined under the policy and governing regulations. Security Officer Service v SCIF 58 CCC 561. Key Civil Bad Faith Cases (Crisci) Refusal to Accept Reasonable Offer Within Policy Limits. (Silberg) Refusal to provide medical care under a private policy while WC claim is pending. (Egan) Failure to properly investigate a claim. (Security Officer s Service v SCIF 58 CCC 561 and Tricor California Inc. v SCIF (1994) 59 CCC 916) Negligent Claims Handling (O Brien, P 1466) Damages and Punitive Damages Most of the time, employers bring action against the carrier for compensatory damages which means they want to recover their losses in the as a result of higher premiums caused by experience modification problems. Punitive damages have been awarded in bad faith cases. To obtain such an award, the employer needs to show fraud, oppression or malice. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 6

7 Consider the Employer s Dilemma The math of reserving works against the employer. Example: The employer thinks a case is fraudulent and reports it as such. Carrier does not pay a dime, but puts a high reserve on the case based upon their in house reserve policies. Employer gets an experience modification based upon reserves. Even if the carrier wins the case in a few years, it is too late, the statistics are no longer relevant. Supreme Court Speaks (2001) State Compensation Insurance Fund, Petitioners, v. The Superior Court of Orange County, Respondent; Schaefer Ambulance Service Inc., et al. 66 CCC 16. This case tested immunity whether a workers' compensation insurer is immune from civil liability under Insurance Code section for allegedly misallocating an insured employer's expenses and reporting that misinformation to a ratemaking organization, resulting in higher premiums for its insured. Background on Schaefer Ambulance The firm of Roxborough, Pomerance, Gallegos & Nye LLP, alleging that SCIF had misallocated and misreported insureds' defense medical-legal expenses to the WCIRB, filed a class action lawsuit in February 1994 on behalf of Schaefer Ambulance Service Inc., Sectran Security Inc. and Universal Courier Ltd. (collectively Schaefer). Declaratory relief, compensatory and punitive damages, attorneys' fees and costs were sought. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 7

8 Nicholas Roxborough Esq., Expense Allocation Problem Between 1983 and 1993, workers' compensation insurers in California reported losses to the WCIRB in a manner set by a unit statistical plan. Losses reported on an employer's premium were categorized as one of three: indemnity, medical, or defense expense According to the Supreme Court's ruling: Medical-legal reports requested by the employer or insurer that were not prepared by the attending physician are properly allocated as defense expenses. But Schaefer alleged, "SCIF either intentionally or negligently misreported such expenses as medical expenses to the [WCIRB]. Hence, the insureds' experience modification factor was artificially inflated, which in turn allowed SCIF to collect excessive premiums." Settlement of a Subrogation Case Person-Western Inc v SCIF (1982), 47 CCC 633. SCIF settled a subrogation case for $4,500 which was $2,319 less than the claim cost. There was no possibility of concurrent employer negligence. Employer sued SCIF, The court held that settlement may not be made by an insurer at the expense of the interests of its insured. It also found cause for a claim of fraud and deceit. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 8

9 Duty to Defend Transport Indemnity v Aerojet Gen Corp (1988) 53 CCC 321. A civil action was brought by two employees against their employer (Aerojet) for aggravation of injures caused by fraudulent concealment. The carrier refused to defend citing doubt as to their obligation. Doubt as to the duty to defend must be resolved in favor of the insured. See also Republic Indemnity (1990) 55 CCC 340 defense of a wrongful termination case. Reserving Too High Notrica v SCIF (1999) 64 CCC 378. The jury found that SCIF had breached the duty of good faith and fair dealing resulting in Notrica suffering damages totaling $478,606 and awarded $20 million in punitive damages, and the trial court awarded $300,000 in attorney fees. This 34 page decision contains considerable discussion as to how adequate reserves should be established and in particular a discussion of reserving for maximum probable potential and what those words mean versus reserving for realistic and reasonable anticipated final costs. What They Did in Notrica SCIF adopted a new guideline maximum probable potential cost. It was to be assumed that the worker would prevail in court and thus all contrary evidence was to be disregarded. SCIF did not inform its insureds, including Notrica, of the change in its reserve policy SCIF developed a training memorandum to assist its sales staff in persuading insureds and potential customers that an actual, realistic value would be assigned to all claims. The change to maximum probable potential cost resulted in Notrica s claims being over-reserved by $1,149,424 and Notrica paying a total of $598,257 in additional premiums from 1990 through 1993 Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 9

10 Diligence, Settlement and Reserves Security Officers Service, Inc. v. State Compensation Ins. Fund 58 CCC 561 Systematic failure to process claims diligently and by SCIF s unreasonable inflation of claim reserves. The appellate court held that under an insurance regime in which the insured s annual claims experience inexorably influences its premiums, the insurer may be liable if it processes claims and sets reserves without good faith regard for their impact on the insured s premiums and potential dividends. Employer Access to Information MacGregor Yacht Corp. v. State Comp. Ins. Fund, supra, 63 Cal.App.4th 448, In the nonjury trial, the court found, that SCIF had breached the implied covenant of good faith and fair dealing by refusing to permit the insured access to claim files or other relevant claims data, refusing or failing to settle claims reasonably, setting unreasonably high reserves, modifying and concealing its reserving practices which maximized receipts at the expense of its insureds, and setting reserves at a maximum probable potential exposure rather than at the most probable result of the case. Incompetent Claims Management Lance Camper Manufacturing Corp. v. Republic Indemnity Co. (1996) 44 Cal.App.4th 194, : [T]he alleged mishandling of claims by an insurer occasioned by the hiring of inadequate legal and medical advisers and insufficient defense investigation and resolution of pending claims implicates the insurance policy s implied covenant of good faith and fair dealing, which imposes limits on the insurer s latitude in discharging its contractual right or duty to defend, investigate and settle claims. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 10

11 Employer s Bill of Rights Upon request of a policyholder, the insurance carrier is obligated to provide a written report on those parts of a claim's reserves that affect the employer's premium. This report is to include information on estimated medical-legal costs, vocational rehabilitation, and other expenses. The insurer must disclose all elements of a claim file that will affect the employer's premium. Confidentiality provisions in the law, however, may restrict an employer's access to the injured worker's medical records and all documents protected under attorney-client privilege. Signed releases may also be required to obtain copies of claims information. More...Bill of Rights There are new duties for the Workers' Compensation Insurance Rating Bureau. The WCIRB is to provide, at the employer's request, a written report containing information about that employer's loss experience, claims, classifications, and policy contracts. The report also must include information about rating plans, manual rules, and any other information that affect the employer's premium rates. The WCIRB will create the position of ombudsman to help employers obtain and evaluate the report from the bureau. After January 1, 1994, every policyholder should be provided information about the new services and the changes in the law. Insurers must inform all of their policyholders about the ombudsman and the report available from the WCIRB. The insurer also must provide an explanation of the changes in workers' compensation laws and a summary of the changes in the rating law. Copyright 2012 Floyd, Skeren & Kelly, LLP Ethics, Page - 11